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Editorial

Lawsuit looks like payback

Government ignores other credit- rating agencies, but hits S&P

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Friday February 15, 2013 5:32 AM

Vendetta,
payback and
shakedown are words being used in the financial press to describe the lawsuit filed last
week by the federal government against major credit-ratings agency Standard & Poor's.

Indeed, it’s hard to come up with any other explanation why the U.S. Department of Justice
singled out S&P among the three big ratings agencies in accusing it of fraud; not even Attorney
General Eric Holder could explain it.

The suit accuses S&P of knowingly misrepresenting the creditworthiness of mortgage-related
securities leading up to the 2008 financial crisis. But why does it exclude the other two agencies,
Moody’s and Fitch Ratings, which were equally bullish on what we now know were very risky
investments?

There would seem to be one plausible, unsavory reason the government would target S&P: It
didn’t appreciate S&P downgrading the government’s debt in the wake of the summer 2011
debt-ceiling impasse in Washington, because it made the administration look bad. Floyd Abrams, lead
attorney for S&P, told CNBC last week that “the intensity” of the government investigation into
the agency’s bond ratings “significantly increased” after the downgrade.

Peter Schiff, CEO of Euro Pacific Capital investment firm, stated: “Given the circumstances and
timing of the suit, can there be any doubt that S&P is paying the price for the August 2011
removal of its AAA rating on U.S. Treasury debt?” He added that as another potential debt-ceiling
showdown looms in Washington, “it’s a foregone conclusion that no more downgrades will be coming,”
since the government has made it known that there will be repercussions.

S&P already is taking a hit. Even if, as many expect, the government isn’t ultimately
successful in its suit, the agency faces big legal bills. It also, in a stinging irony, saw its own
parent company, McGraw-Hill, downgraded by Fitch last week due to concerns over the legal
action.

No doubt there is plenty of bad behavior to go around among all the players in the credit
crisis. Especially in its wake, Wall Street often is referred to as a giant casino; certainly, many
in the financial industry should have known that giving 100 percent financing to people who were
unlikely to repay and then immediately selling off those mortgages to someone else wasn’t the best
idea.

But no one apparently believed the worst-case scenario, which ended up happening when the
mortgage meltdown threatened to spark a complete financial-system collapse. Why? It was the
government itself that helped push and fuel the idea. Through moves such as mandating lower
underwriting standards and its backing of Fannie Mae, a key participant in the housing bubble, the
federal government left itself, and ultimately taxpayers, vulnerable to the collapse.

As detailed in the 2011 book
Reckless Endangerment and numerous press accounts, members of Congress, including
Democratic Reps. Barney Frank of Massachusetts and Maxine Waters of California and Republican Sen.
Kit Bond of Missouri, were fierce defenders of Fannie Mae as executives there enriched themselves
while fueling a dangerous and unsustainable mortgage boom.

Regardless of the outcome of this suit, the Obama administration has proved expert at
demagoguery and blaming others. As
Washington Post columnist Robert J. Samuelson said this week of the S&P suit: “for now
S&P is a scapegoat, and the Department of Justice has become the Department of Blame.”